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City of Pleasanton Water Rate Study Executive Summary EXECUTIVE SUMMARY In preparing this water rate update, the following findings were made and recommendations are proposed. FINDINGS AND RECOMMMENDATIONS The findings and recommendations related to the revenue requirement analysis reflect analysis of actuals, estimates, and projections from FY 2005 -06 through FY 2010 -11. 1. Significant expense increases have occurred. Operating expenses are increasing in excess of the rate of inflation primarily because of the cost of purchased water from Zone 7. 2. Chronic revenue shortfalls have occurred. The revenue from existing rates has been insufficient in recent years, resulting in a significant decline in the Water Fund's operating and capital reserves. 3. Overall revenue increase in FY 2010 11. An increase of 21% in rate revenue is recommended in FY 2010 -11 to align revenues with expenses. With this increase, the Water Fund should avert further declines in reserves, but will not be sufficient to replenish reserves. 4. Future revenue increases. City staff proposes increasing rates annually using a formula that will pass through any increase in Zone 7's rates at cost and will increase the City's local costs to keep pace with inflation. Current projections indicate annual increases of approximately 7% (assuming 3% annual inflation) through FY 2014 -15. 5. Implementation of revenue increases. The increase will be implemented by increasing consumption charges effective August 1, 2010 and by increasing both quantity and service charges effective January 1, 2011. The cost -of- service analysis determines the distribution of revenue among the customer classes. The City's cost of service had not been evaluated since the early 1990s. Certain changes in customer classes as well as in the rate structure needed to be reflected in the analysis. 6. Fixed and variable charge structure. City's rates currently generate about 80% of the revenue from the variable charges (i.e., consumption charges), which falls well within the range considered by the California Urban Water Conservation Council to promote conservation. This relationship was preserved. 7. Customer classes. Multi- family customers were moved from the residential class to the commercial class to reflect the commercial nature of rental property. In addition, the uniform commercial consumption charge is much simpler to administer for multi family customers compared with the residential tiered rates. March 18, 2010 Page 1 HF &H Consultants, LLC